Business studies-revision-notes-2Document Transcript
BUSINESS STUDIES REVISION NOTES CHAPTER 2: ECONOMIC SYSTEMS AND BUSINESS GROWTHBusinesses work in one of the three sectors of the economy: i. Primary – extraction of natural materials from earth – fishing, farming, mining ii. Secondary – manufacturing of goods from raw materials – car manufacturing iii. Tertiary – providing a service – shop assistance, police, education, healthcareMost developed countries have seen a decline in the number of workers in the secondary sector and a rise in the number employed inthe tertiary sector. This is sometimes used as a definition of deindustrialization (more generally defined as a decline in the importanceof the secondary sector of the economy). In the UK today, the distribution of workers is heavily biased towards the tertiary sector.Only 1% of workers are employed in the primary sector, 17% in the secondary and 82% in the tertiary.Free Market Economy: when all resources in the economy are privately owned. All businesses are in the private sector and the statecontrols nothing. No countries in the world are pure free market economies, though some such as the USA have a relatively smallpublic sector. It is a good system in that consumers are free to choose what they want to buy, workers are motivated to work hard asthey will keep most of their wages since taxes will be low, businesses will compete giving choice to consumers and helping to keepprices low and quality high. On the other hand there are problems. Essential goods such as healthcare and education will only beavailable to those who can afford them. As there is no government control or management of the economy there is likely to be moreextreme periods of boom (when lots of demand causes prices to rise) and recession when very low demand causes businesses to closeand creates unemployment). Powerful businesses could dominate their markets (become monopolies) and exploit consumers withhigh prices and low quality while keeping competition out.Command/Planned Economy: when all resources in the economy are owned by and allocated by the state. There is no privateownership, no private sector. The ex-communist countries were like this. Today only North Korea is close to being a purely plannedeconomy. Countries like China and Cuba do have growing private sectors. A command economy will have advantages such as thegovernment will be able to provide work for everyone and will eliminate waste such as marketing expenses that exist when there iscompetition between firms. The scarce resources will be used for the people and not used to produce luxury goods for the wealthyfew. However there are many disadvantages. There is very low productivity since workers and would-be businesses owners have noincentive to work as they are not allowed to keep the fruits of their labour. Old Communist Russian joke: The government pretends topay us, and we pretend to work! The government may over produce some goods and under produce others, leading to shortages andgluts. Consumers will have no choice even when goods are available.Mixed economy: Where some resources are privately owned and some resources are allocated by the government (typically areassuch as education, healthcare, road provision, defence, public transport, water supply, electricity. There exists both a private and apublic sector. Virtually all countries in the world are mixed economies though they vary greatly in terms of the ratio between publicand private ownership.Privatisation: the action of selling a public sector business into private ownership. In the UK in the 1980s and 1990s electricitysupply, water supply, gas supply, airport authority, telecommunications, steel manufacturing, rail transport and other markets were allprivatised. The government, for most of these years lead by Margaret Thatcher, believed that the businesses would become far moreefficient and could attract more finance for modernization if private businessmen/women could invest in them. The sale of thesebusinesses raised huge amounts of money for the government. Competition could be created which would keep prices low and qualityhigh. However, critics argued as profit would become the chief motive, loss making areas of these businesses might be closed (egrural train services), that unemployment would rise (British Telecom, when privatised, reduced its workforce from 250,000 to130,000!) Also only the wealthy owners would benefit now by keeping the profits whereas before the whole country benefited.Comparing Business Size: there are 4 methods, none of which is perfect. It is best to use all four if possible. i. By number of employees – easy but can be misleading if business is labour or capital intensive ii. By value of output – good for same industry comparisons but not much use across industries iii. By size of profit – very unsatisfactory given businesses can have very different experiences year to year iv. By capital employed – by quantity of money invested – but some labour intensive businesses have little capitalBusiness Growth: can be internal/organic (business reinvests profits to finance growth) or external (joins another firm) i. Horizontal growth – when a firm buys/merges with another at the same stage of production in the same industry. Eg one supermarket chain buys another. Benefits: economies of scale, fewer competitors, increased market share. ii. Backwards Vertical Integration – a firm buys/merges with another which is at an earlier stage of production in the same industry. Eg McDonalds buys a meat processing factory. Benefits: lower costs, certain supply of raw materials/components. iii. Forwards Vertical Integration – a firm buys/merges with another which is at a later stage of production in the same industry. Eg a car manufacturer buys a chain of car showrooms. Benefits: guaranteed outlet for goods, denies outlet for rivals, closer to customer so better information and market research flow. iv. Conglomerate merger – a firm buys/merges with another which is in a completely unrelated industry. Eg an electricity distributor merges with a film production company. Benefits: spreads risks, cross flow of new ideas/practicesSome businesses stay small as 1) market is too small for growth 2) owner fears loss of control will follow growth 3) some businessesneed to be small to stay close to customer wants – eg hairdressers, plumbers, car mechanics.